Quick Bites | Prepare for Trump 2.0

No-one who watched the first Presidential Debate could have been impressed by Joe Biden. He came off looking old and decrepit and could barely string a sentence together. So naturally, markets are reducing his chances of holding on to the presidency, and starting to calculate what this might mean as we prepare for Trump Round 2.

The increasing likelihood of a second Trump administration has helped spark a selloff in US government bonds, with investors betting policies including tax cuts could drive up deficits and inflation. 

Treasury yields, which rise when bond prices fall, started surging the day after the debate; a weak showing from Biden could also help tip control of Congress to the Republicans, giving them more chance to implement their policies. Generally speaking, budget deficits tend to be larger under one-party control. Many investors think that elevated deficits have already played a role in driving up Treasury yields in recent years by increasing the supply of bonds that the market must absorb and putting upward pressure on inflation.

Trump has made broad promises about cutting taxes. He has also said he would impose sweeping tariffs, which could have an uncertain economic impact, potentially adding to inflation but also raising revenue and slowing economic growth.

Investors have focused on how the 2017 tax cuts are scheduled to lapse after the end of next year. Many expect a Republican-controlled Congress and White House would extend all of them, reducing projected revenue by nearly $4 trillion over the next decade. President Biden wants to only extend tax cuts for households making under $400,000, letting taxes rise for those above that threshold.

The yield on the benchmark 10-year US Treasury note climbed above 4.45%, up from 4.28% before the Biden-Trump debate. It has since bounced around quite a bit as can be seen from the 1-week chart.

Source: Trading Economics